When it comes to end-of-life planning, there’s a lot to consider. In addition to getting all the right paperwork in order, it’s also essential to decide on the timing of asset transfer.
While many people choose to transfer an estate post-mortem, there’s also an option to transfer the estate (or a portion of it) while someone is still alive. If you’re contemplating doing so, there are pros and cons to consider.
What Does it mean to Transfer an Estate Before Death?
There are several ways you can transfer assets from your estate before death.
- Set up a living trust. A living trust is an account that holds property and assets you put into it and technically owns them. You can set up a revocable trust (you can cancel it at any time and retain access to assets while you’re alive) or irrevocable trust (it’s set in stone, and your assets now belong to the trust).
- Give gifts to future heirs. There are plenty of ways to transfer wealth from your estate while you’re still alive. One of the most popular options is through giving gifts to loved ones. These gifts can be cash (up to $16,000 in 2022 before you trigger the need for a gift tax form), opening a whole life insurance policy in their name, building a trust to distribute wealth to them over time, and more.
Pros of Transferring an Estate Before Death
There are several benefits of transferring aspects of your estate before death:
- You may be able to avoid probate: Putting items in a living trust could allow your heirs to avoid probate, which is the legal process of transferring an estate that can often be time-consuming and expensive.
- A living trust is private: Wills are public documents meaning anyone can access them after probate, whereas the details of a living trust are only for the grantor and trustee to know. That means assets are kept confidential instead of becoming part of the public record.
- You can see the impact of your estate: When you give gifts to loved ones while you’re alive, you can see the impact of your giving. For example, if you gift a grandchild money to buy a car, you can see how the car changed their day-to-day life and feel their gratitude while you’re here.
Cons of Transferring an Estate Before Death
There are also several downsides to transferring an estate before you die:
- Gifted wealth will leave your hands: One of the main benefits of transferring wealth after death is the guarantee that the deceased doesn’t need their estate anymore. Be sure that you won’t need to access any funds you’re considering gifting, even in the case of long-term elder care or medical costs.
- Transferring assets can be time-consuming: When you decide to transfer assets, whether it’s to a living trust or an individual, there will be paperwork involved. And depending on the complexity of the asset, you may also need to consult with an estate attorney or professional trustee.
The Bottom Line
There’s no right or wrong when it comes to transferring assets in your estate. But there may be different tax implications depending on if you decide to transfer the estate before or after death, or how you decide to package gifts of wealth. Whether you’re opening a life insurance policy for your child or grandchild or giving a lump sum gift towards a down payment, it’s important to proactively know the implications now and in the future.
For this reason, it’s often advisable to consult with a financial planner and tax professional, or estate attorney. These financial professionals can help you determine how to safeguard your estate, get it in the hands of the ones you love, and avoid unnecessary taxes in the process.